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What a Possible HUD Announcement in 2023 Could Mean for Private Landlords
Published quarterly for chapters, associated real estate investor associations, their members and guests.
Editor Brad Beckett brad@nationalreia.org
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By David Pickron
Have you ever been punished for something you didn’t do or that was completely out of your control? My guess is you have and that the thought that flashed through your mind at the time went something like this; I didn’t do anything wrong! Frustration sets in as you try and figure our what you could have done differently, reaching the conclusion that sometimes these things are out of your control. The situation below might be one of those times.
On April 12, 2022, Marcia Fudge, Secretary of the U.S. Department of Housing and Urban Development, issued a memorandum to her staff with the subject line: Eliminating Barriers That May Unnecessarily Prevent Individuals with Criminal Histories from Participating in HUD Programs. In short, HUD is trying to determine what criminal criteria HUD programs should use, if any, when qualifying an applicant. At that time, she called for a six-month study period that ended October 14, 2022. History shows, when HUD makes a policy for government housing, they slowly try to implement it into the private sector. And even though it hasn’t happened yet, it may be coming.
This is where the “unfair” results kick in. Think about those jurisdictions who have source of income as a protected class, where it is illegal to discriminate against people who use Section 8 vouchers as income. As a private landlord, whether you want to or not, you are required to take section 8 housing if your rents are in line with the standard rental rate of local housing providers. If this happens, the government just took your private housing and turned it into Government Housing, and you must follow all of HUD’s rules and recommendations or else.
As an example, I have an income producing rental home in Tucson, Arizona. The market value of rent is $1100 per month and a Section 8 voucher is willing to pay $1100. Section 8 rationalizes that your financial risk is covered by the government so there is no need for me as a private landlord to financially qualify them any further. The most I can require is three times the applicant’s portion of the rent which is usually zero to begin with. As part of my normal tenant onboarding process, I then run the applicant through a background check to see if there is any criminal history and subsequently find this individual has several felony drug convictions. Right now, I can decline this individual based on a “no felony drug conviction in the last 7 years” that is a key part of my rental applicant criteria. This is where it gets tricky based on what HUD could propose regarding criminal history because of the memo referenced above. They are trying to justify mandating the removal of any criminal history search, claiming that a criminal history has no correlation with you as a private landlord receiving the rent because the Government is covering that part. That is a scary thought process.
As more jurisdictions vote to add source of income as a protected class, more private rentals will be sucked into Government Housing Rules and criminal histories could become a thing of the past. And it won’t stop there as HUD will slowly try and use a similar disparate impact argument in the other areas that we as private landlords use to protect our investments, forcing the private market to follow the direction of HUD, leading to the demise of criminal history and ultimately private landlords.
Knowing the Section 8 payment tables in your area and comparing them with market rent will help you decide if you want the government as a partner or not. If you have homes or rentals that can demand higher rents than what the housing authority is willing to pay you will be able to duck this discrimination claim for now. But you never know how long that is going to last as the market has something to say about it.
All these moves have made me look at landlords in the private market and get to the root of the HUD study by asking this critical question; does criminal history affect a person’s ability to pay rent? I accessed my own data sets from our tenant background screening company, Rent Perfect, and analyzed actual and factual numbers to answer this question. We took all applicants who applied for a qualification to rent either a single-family or multifamily rental across all fifty states from January 1, 2022, through October 15, 2022. See the graphic for specific results. Generally speaking, applicants with NO criminal history are twice as likely to have a credit score over 600, which translates to rent getting paid more consistently and ontime. As a landlord, those are the type of odds that play in my favor. Getting rid of criminal history as a qualifying factor for HUD properties now, and inevitably for private individuals in the future would put you and your property at risk financially and physically. At Rent Perfect we know different criminal histories pose more of a threat than others, but we also know Landlords are not the judge and jury and hold no special training on how to determine recidivism rates or risk based on each crime. Our research results clearly show that no matter what the crime is, whether felony or misdemeanor, credit scores go down and collecting rent is riskier for those with a criminal history than without.
So, what do you do about it? Rather than sulk in the corner which may have been your childhood response to unfair treatment, we all need to band together and fight to protect our rights as private landlords. Uniting your voice with a local Real Estate Investment Association (REIA) can help us as landlords stand our ground and protect our investments. After all, we didn’t do anything wrong.
For property owners, although it hasn’t happened yet, this scenario may soon play out based on some recent actions being considered by HUD.
David Pickron is President of Rent Perfect, a private investigator, and fellow landlord who manages several short- and long-term rentals. Subscribe to his weekly Rent Perfect Podcast (available on YouTube, Spotify, and Apple Podcasts) to stay up to date on the latest industry news and for expert tips on how to manage your properties.
Members of National REIA can take advantage of special pricing from RentPerfect; the solution for rental property owners and managers for screening & managing tenants. Learn more by visiting www.rentperfect.com or calling 1-877-922-2547.
